Analyse positive impacts of a merger between two firms.
One positive impact of a merger could be due to economies of scale. One economy of scale that could occur is bulk buyinh economies of scale. As a firm gets larger and output increases through a merger, it will have to buy more from suppliers for production. The firm will therefore be able to place more pressure on suppliers to provide the good at a lower cost. As a result, the long run average cost per unit of production will fall for the firm as output increases, shown by the decrease in the long run average cost from LRAC1 to LRAC2 as output increases from Q1 to Q2. This will increase profit margins for the larger firm. Hoever, it could be argued that the firm may also experience diseconomies of scale if they increase output. This could be if running a larger firm leads to management and communication issues, increasing costs of production for the larger firm, shown by the increase in LRAC from LRAC2 to LRA3 as output increases from Q2 to Q3.
Another positive impact of a merger could be reduced risk. In a conglomerate merger, where firms from different industries join together, it can be argued that the merger will reduce risk of loss for the company. This is because if the demand for one good falls, the firm can continue to rely on the demand for other goods produced by the firm, hence the firm will not be imapcted severely. This reduction in risk will help the firm to operate for a longer period of time. However, it could be argued that with diversification, the firm may spread its attention to the production of several different goods. As a result, focus will be lost on the production of a particular good, and there will be little innovation in each particular sector within the firm. This could lead to the firm being outcompeted by other firms in the market, and the conglomerate firm will lose a market share in the goods that it produces, leading to reduced output compared to the individual firms prior to the merger.
